Question

1. Suppose that for consumers A and B trading goods 1 and 2 in a general equilibrium framework

uaxa,1,xa,2=xa,1∙xa,2     and   ubxb,1,xb,2=xb,1+2xb,2

The initial endowments are given by ωa=(2,2) and ωb=(3,2) . Depict graphically the Edgeworth box including

1. Its dimensions
2. The location of the initial endowment
3. Each consumer’s indifference curves.

Note that in part (c), I just looking for you to depict the general shape of these indifference curves; you do not have to plot them out using the mathematical functions.

Answer 1

An Edgeworth box helps us study the resource distribution between two individuals and determine efficient trading patterns to achieve maximum utility.

For the above case we see:

Total endowment of good X1= 2+3 = 5

Total endowment of good X2= 2+2 = 4

(a) Plotting good 1 on horizontal axis and good 2 on vertical axis, dimensions will be 5 units and 4 units respectively.

(b) Initial endowment is shown on point (2,2) and (3,2) for A and B respectively.

(c) The shapes of Indifference curves will be convex for A and downward sloping straight line for B. This is because utility function for A denotes a normal choice of goods between 1 and 2. Utility function for B is that if substitute goods.

See image.

Kindly note that as demanded, the shapes have been depicted without mathematical plotting. Thanks!